Formal climate change negotiations don’t resume until May, but Germany, Japan, and New Zealand are quietly shepherding the world’s carbon markets towards compatibility with each other – and, they hope, with the UNFCCC. Here’s a look at what lies ahead for global carbon markets in 2016.

29 January 2015 | It’s been six weeks since climate negotiators adopted the historic Paris Agreement, and most of those negotiators have been taking some well-deserved time to recharge for what promises to be a grueling year ahead – even as practitioners outside the formal negotiating sphere scramble to catch up with the apparatus that was unleashed upon them that historic day in December.

“We’ve had to re-shape the task of the Carbon Market Platform in light of the Paris Agreement,” says Julia Kleinschmidt, an environmental economist at the German Ministry of Environment.

Germany launched the platform in October of last year at the behest of the Group of Seven (G7) industrialized countries (Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States), with a vague mandate to create a talking space for countries to philosophize about carbon markets. After Paris, they found themselves with a clear, concrete, and binding agreement to operationalize.

“We didn’t expect any provision on carbon markets [to emerge in Paris], but what we have now is quite terrific,” she adds, referencing Article 6 of the Paris Agreement – an elegantly simple text that gives individual countries a green light to develop carbon markets domestically and even trade emissions reductions internationally, provided they develop accounting procedures that pass muster with the United Nations Framework Convention on Climate Change (UNFCCC).

“As you can imagine, the views on the carbon market are quite divergent among the G7 countries,” adds Kleinschmidt. “But we’ve discovered some overlap where we think it would make sense to work together at such a high level.”

She wouldn’t elaborate, but says we can expect details to emerge shortly – echoing sentiment that, in one form or another, is being expressed by people across the carbon community: from the World Bank’s Networked Carbon Markets initiative, which will be meeting in Zurich in March, to New Zealand’s commitment to developing standards and guidelines for the environmental integrity of markets, which launched the day the Paris Agreement was adopted. Eighteen countries have endorsed the New Zealand declaration to-date, including Germany, which has reached out to New Zealand about pooling their efforts.

“We are keen to talk with countries about advancing the development of the global market and crucially, putting in place the standards and guidelines for environmental integrity,” says Kay Harrison, who heads the New Zealand Environment Ministry’s climate initiative.

“There’s a lot going on behind the scenes,” said one negotiator. “A lot of phoning around.”

Most of that phoning is among market participants and NGOs anxious to keep the Paris momentum going, but negotiators also have their work cut out for them before talks formally resume at the Bonn Climate Change Conference in late May. There are currently five separate working groups tasked with handling market-related issues, and those need to be streamlined if the process is to move forward.

With so many efforts moving in parallel, the World Bank’s March meeting in Zurich is shaping into an unofficial powwow to chart paths and identify pitfalls – plenty of which remain, but none of which seem insurmountable.

“There are certainly some difficult issues, but a lot of it’s minutia,” says Jeff Swartz, International Policy Director for the International Emissions Trading Association (IETA).

“The planet can’t wait for all that to be worked out, and the spirit of Article 6 is quite clear. It says to countries: ‘You can go pursue your approach, but just make sure the accounting provisions are consistent with what’s defined at the UNFCCC.’”

Nearly 40 national and more than 20 sub-national jurisdictions are participating or preparing to participate in emissions trading systems today, and other countries are considering other market options. Source: The World Bank

The Twofold Path: Countries or Companies?

Article 6 of the Paris Agreement lays out two paths for creating international carbon markets. The first is the one the G7 and New Zealand are shepherding – namely, the one that lets domestic programs trade their emission-reductions internationally. On the ground, this might mean an expansion of the kind of market linkages that California and Quebec have forged (with Ontario soon to join) and that China and South Korea are thinking about.

“The role of the UN will be to establish clear and robust accounting rules that everyone abides by so that we know that each emissions reduction will only be counted once but really letting the countries themselves drive the market transactions,” said Nathaniel Keohane, the Vice President in charge of Global Climate for the Environmental Defense Fund (EDF), in December. “This is an interesting contrast with the Kyoto Protocol, which established a top-down market, because here we see the UN recognizing the realities on the ground, the jurisdictions that are already using markets, and saying, ‘Here’s some basic rules of the road to promote and foster the growth of those markets, but also to let countries take a driving role at doing that.’”

The second path, championed by Brazil, will be forged within the UNFCCC itself and offer a centralized mechanism for transferring emissions reductions, known under the Paris Agreement as ITMOs (Internationally Transferred Mitigation Outcomes). This centralized approach will likely build on the market infrastructure and experience of the Clean Development Mechanism (CDM), though it is unclear whether the CDM’s units (CERs) will actually be viable post-2020.
These two paths are not mutually exclusive, and in fact the world is already scoping out both at once.

Article 6: Annotated

Here is the full text of Article 6, with brief summaries of each paragraph in simple English.

Parties recognize that some Parties choose to pursue voluntary cooperation in the implementation of their nationally determined contributions to allow for higher ambition in their mitigation and adaptation actions and to promote sustainable development and environmental integrity.

Countries can cooperate with each other to ramp up their climate change strategies (“allow for higher ambition in their mitigation and adaptation actions”) and promote sustainable development.

Parties shall, where engaging on a voluntary basis in cooperative approaches that involve the use of internationally transferred mitigation outcomes towards nationally determined contributions, promote sustainable development and ensure environmental integrity and transparency, including in governance, and shall apply robust accounting to ensure, inter alia, the avoidance of double counting, consistent with guidance adopted by the Conference of the Parties serving as the meeting of the Parties to the Paris Agreement.

Countries can meet their emissions reductions targets (“nationally determined contributions”) by trading emissions reductions (“internationally transferred mitigation outcomes”) among each other, and they can create their own governance structures to manage the process, but they must make sure the trading promotes sustainable development, and they must follow accounting principles approved by the UNFCCC.

Questions Raised:

The Paris Accord allows the transfer of emissions reductions between countries, but the national climate strategies are not as uniform as the caps were under the Kyoto Protocol.Interestingly, the Paris Accord does say that trading must promote sustainable development, which seems like a remnant from the days of differentiation.

The use of internationally transferred mitigation outcomes to achieve nationally determined contributions under this Agreement shall be voluntary and authorized by participating Parties.

No countries are obligated to participate in the carbon markets.

A mechanism to contribute to the mitigation of greenhouse gas emissions and support sustainable development is hereby established under the authority and guidance of the Conference of the Parties serving as the meeting of the Parties to the Paris Agreement for use by Parties on a voluntary basis. It shall be supervised by a body designated by the Conference of the Parties serving as the meeting of the Parties to the Paris Agreement, and shall aim:

To promote the mitigation of greenhouse gas emissions while fostering sustainable development;

To incentivize and facilitate participation in the mitigation of greenhouse gas emissions by public and private entities authorized by a Party;

To contribute to the reduction of emission levels in the host Party, which will benefit from mitigation activities resulting in emission reductions that can also be used by another Party to fulfil its nationally determined contribution; and

To deliver an overall mitigation in global emissions.

The UNFCCC will also create a centralized trading platform that countries can use to trade emissions reductions. Some are calling this the “Sustainable Development Mechanism”.

Emission reductions resulting from the mechanism referred to in paragraph 4 of this Article shall not be used to demonstrate achievement of the host Party’s nationally determined contribution if used by another Party to demonstrate achievement of its nationally determined contribution.

If one country transfers an emissions reduction to another country, then it can no longer deduct those emissions from its own carbon inventory. In other words: no double-counting.

The Conference of the Parties serving as the meeting of the Parties to the Paris Agreement shall ensure that a share of the proceeds from activities under the mechanism referred to in paragraph 4 of this Article is used to cover administrative expenses as well as to assist developing country Parties that are particularly vulnerable to the adverse effects of climate change to meet the costs of adaptation.

Some of the money raised from the central platform will go to maintaining the mechanism, and some will go to least-developed countries.

The Conference of the Parties serving as the meeting of the Parties to the Paris Agreement shall adopt rules, modalities and procedures for the mechanism referred to in paragraph 4 of this Article at its first session.

High-level negotiators will provide more details on the Sustainable Development Mechanism at the end of this year in Marrakesh.

Parties recognize the importance of integrated, holistic and balanced non-market approaches being available to Parties to assist in the implementation of their nationally determined contributions, in the context of sustainable development and poverty eradication, in a coordinated and effective manner, including through, inter alia, mitigation, adaptation, finance, technology transfer and capacity-building, as appropriate. These approaches shall aim to:

Promote mitigation and adaptation ambition;

Enhance public and private participation in the implementation of nationally determined contributions; and

Enable opportunities for coordination across instruments and relevant institutional arrangements.

Countries can also cooperate without using markets, and non-market approaches can be integrated with market-based approaches. Non-market approaches have been promoted by countries such as Bolivia and Venezuela and might include policies to promote renewable energy, as an example.

A framework for non-market approaches to sustainable development is hereby defined to promote the non-market approaches referred to in paragraph 8 of this Article.